A technical indicator
is a method of chart analysis, usually of price over
time or volume, using various formulae designed to
highlight specific characteristics and provide signals
to help forecast market movements. Indicators can
also be derived from the use of trendlines and price
patterns, which are not based on formulae and are
more subjective.
No single indicator
can signal all changes in trend. Therefore, a number
of indicators should be used together to confirm one
another. Complimentary indicators can be chosen from
the following basic groups:
Trend indicators
identify a change in trend after it has taken place
(known as lagging indicators). These include price
patterns, trendlines and breakouts, Moving Averages
(MAs), Bollinger Bands and Keltner Bands.
Momentum indicators
can warn of latent strength or weakness, often ahead
of a turning point or market reversal (known as leading
indicators). These include the various oscillators
(RSI, stochastics, ROC, etc).
Most indicators are
based on a manipulation of price data. Volume indicators
are independent of price, and can offer a more objective
view of the quality of a price trend. Smoothed ROC
is a good example of a volume indicator.
As you learn to use
indicators, you'll be amazed at the amount of information
you can gather from carefully applying just two or
three -- from trendlines, MACD, MAs, RSI, Parabolic
SAR, to CCI. Once you've experimented with various
indicators, it's usually best to stick to the ones
you've become comfortable with. and most successful
with.
Begin by reading
about the indicators, look at the examples we've provided,
and you should quickly gain a pretty good understanding
of the various signals produced and how you can apply
them in your own approach.
Technical indicators
generate various types of signals based on such events
as the crossing of two lines, a line crossing an important
threshold, or a particular pattern such as divergence
between the price and the indicator. These events
may provide an early warning of a price move and often
provide investors with specific buy and sell signals.
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